Bank of Canada seen on hold after Trump win, but rate cut chances rise

Leah Schnurr

3 Min Read

The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie

OTTAWA (Reuters) - The risk of another Canadian interest rate cut has risen with the U.S. election victory of Donald Trump, though economists expect the Bank of Canada to stand pat until 2018 as they gauge the economic impact of his campaign promises.

A Reuters poll of primary dealers forecast the Bank of Canada’s next move would be a hike in the first half of 2018, but analysts said fears about Trump’s impact on Canadian trade have raised the risk of a cut.

Renewed expectations for a hike are inline with a June poll of primary dealers, the institutions that deal directly with the central bank’s debt auctions.

“If the bank is of the view that this has negative implications for exports, given that’s an area where they’ve been disappointed they haven’t seen more strength, they may decide they have to address it,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

The central bank cut rates twice last year as the plunge in oil prices hit the economy. The bank has kept rates at 0.50 percent since July 2015, but acknowledged after its policy meeting last month that it had considered cutting again.

Economists said the possibility of slower trade globally and in North America is the biggest threat to Canada from the election of Trump.

The Republican nominee pledged to renegotiate the North American Free Trade Agreement, a concern for Canada which sends about 75 percent of its exports to its southern neighbor.

But economists said it was not clear what changes he would make or when. There are also potential benefits in his other promises, including cutting taxes and rebuilding infrastructure.

“There is a significant chance that if the positive parts of Trump’s policies are approved by Congress and some of his less friendly policies are blunted, that the U.S. growth outlook could actually improve in 2017,” said Doug Porter, chief economist at BMO Capital Markets.

If the U.S. Federal Reserve raises rates to counter an accelerating U.S. economy, the subsequent decline in the Canadian dollar would also take some pressure off the Bank of Canada to act, said Paul-Andre Pinsonnault, director of economics and strategy at National Bank of Canada.

The variety of unknowns is likely to prompt the bank to keep its dovish tone in its December policy statement, economists said.